Encana -OIl and Natural Gas – Prayer Is Not A Strategy : Get Out

Too little , too late

The company will outspend cash flow next year, with its cash flow of $1 billion to $1.2 billion reflecting a cash shortfall of $550 million, based on U.S. crude prices of US$50 per barrel and US$2.75 natural gas prices.

Our position: Analysts and the company executives are sleep walking past the graveyard.

Encana Corp slashes dividend and cuts capital spending

  • from Tuesday Financial Post

Encana Corp. is planning to “reset” its dividend next year as it adjusts to a protracted downturn that has seen oil prices decline to a six year-low.

The Calgary-based company said it is cutting its dividend by 79 per cent to six cents from 28 cents. The company’s stock tumbled more than eight per cent on the Toronto Stock Exchange on Monday.

“This reset better aligns our dividend with our cash flow or balance sheet and recognizes the very high quality investment options in our portfolio,” CEO Doug Suttles told analysts during a conference call outlining the company’s 2016 capital program.

Canada’s oil and gas sector is in the middle of an austerity drive, as one of the world’s highest-cost jurisdictions comes to terms with prices that have dipped below US$35 per barrel and have lost more than 50 per cent of their value in the space of a year.

The industry has lost 35,000 jobs since OPEC members started driving down prices by raising output in a bid to squeeze out high cost-producers in November 2014.

Canadian companies have responded by reducing headcounts, shelving projects, reining in capital expenditure and cutting dividends to protect their balance sheets — and there may be little respite in the new year.

Encana plans to cut its capital spending by 27 per cent next year to between US$1.5 billion to US$1.7 billion, with half the budget allocated to its Permian basin straddling Texas and New Mexico.

Indeed, the company plans to raise investment in its Permian operations to around $800 million from $700 million a year earlier, but will throttle back in Eagle Ford, and in the Canadian shale plays of the Duvernay and Montney, as it focuses on the most cost-effective play in its portfolio.

While the capital budget was in line with expectations, both total production and liquids production fell short of expectations, which will likely see our cash flow estimates come down with leverage increasing further,” wrote Kyle Preston, an analyst with National Bank Financial Inc. The analyst sees the company’s announcement as “negative,” and cut its price target to US$8 from US$10.

The company will outspend cash flow next year, with its cash flow of $1 billion to $1.2 billion reflecting a cash shortfall of $550 million, based on U.S. crude prices of US$50 per barrel and US$2.75 natural gas prices.

“While we do not see any near-term risk of breaching any debt covenants, we believe the budget may have to be revised down again if commodity prices remain at or near current levels for an extended period,” Preston said.

NONSENSE_ look where prices are – don’t base analysis on dreams:

Crude Oil & Natural Gas

INDEX UNITS PRICE CHANGE %CHANGE CONTRACT TIME ET 2 DAY
USD/bbl. 35.71 -1.64 -4.39% JAN 16 11:25:36
USD/bbl. 37.14 -1.31 -3.41% JAN 16 11:24:40
JPY/kl 28,540.00 -870.00 -2.96% MAY 16 11:26:00
USD/MMBtu 1.79 -0.03 -1.70% JAN 16 11:25:41

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UPDATE:

Data from the U.S. Energy Information Administration showed a growing glut, with crude inventories up 4.8 million barrels last week. Analysts in a Reuters poll had forecast a decrease of 1.4 million barrels.

“Only the staunchest contrarian could derive anything bullish out of that report,” said Peter Donovan, broker at Liquidity Energy in New York.

“The actual numbers were more bearish than all expectations, as well as more bearish than the API report released last night,” he said.

OPEC Says Crude Production Rose to Three-Year High in November $ 100 Never Again

  • iraq led output gains, countering pullback in Saudi Arabia
  • Non-OPEC supply seen falling by 380,000 barrels a day in 2016

OPEC raised crude output to the highest in more than three years as it pressed on with a strategy to protect market share and pressure competing producers.

Output from the Organization of Petroleum Exporting Countries rose by 230,100 barrels a day in November to 31.695 million a day, the highest since April 2012, as surging Iraqi volumes more than offset a slight pullback in Saudi Arabia. The organization is pumping about 900,000 barrels a day more than it anticipates will be needed next year.

Benchmark Brent crude dropped to a six-year low in London this week after OPEC effectively scrapped its output ceiling at a Dec. 4 meeting as de facto leader Saudi Arabia stuck to a policy of squeezing out rival producers. Members can pump as much as they please, despite a global surplus, Iran’s Oil Minister Bijan Namdar Zanganeh said after the conference. Brent futures traded near $40 a barrel in London on Thursday.

Non-OPEC supply will fall by 380,000 barrels a day next year, averaging 57.14 million a day, with an expected contraction in the U.S. accounting for roughly half the drop, the organization said Thursday in its monthly report. It increased estimates for non-OPEC supply in 2015 by 280,000 barrels a day.

The group maintained projections for the amount of crude it will need to pump next year at 30.8 million barrels a day.

Iraqi Volumes

Iraqi production increased by 247,500 barrels a day to 4.3 million a day last month, according to external sources cited by the report, which didn’t give a reason for the gain.

Iraq has pushed output to record levels this year as international companies develop fields in the south, while the semi-autonomous Kurdish region increases independent sales in the north, according to the International Energy Agency. Production had dipped in October as storms delayed southern loadings and as flows through the northern pipeline were disrupted, according to Iraq’s Oil Ministry.

Production in Saudi Arabia slipped by 25,200 barrels a day to 10.13 million a day in November, OPEC’s report showed.

The report didn’t make any reference to how OPEC’s data will re-incorporate output from Indonesia, which rejoined the organization on Dec. 4 after an absence of seven years.

$100 never again; there’s a new normal for oil

“Oil prices could fall lower in 2016,” Gheit said. “I’m talking $2 to $3 dollars per barrel. I don’t see it dropping below $30 per barrel.”

The decline in crude has had a big impact on major oil companies. Shares of ExxonMobil (XOM), ConocoPhillips (COP), and Chevron (CVX) have crashed as the pain from lower prices spreads.

“Producers have already seen a collapse in earnings, and we expect weakness to continue into next year,” Gheit said. “Most independent oil and gas producers in the U.S. are in the red. They’re losing money.”

But it’s not all bad news. A drop in crude means lower gas prices, so Americans are not digging as deep into their wallets at the pump.

“This is a big break for the taxpayer,” Gheit said. “The average American family will save between $700 to $800 per year as a result of a drop in oil prices.”

The US Energy Sector on the Verge of a Cataclysmic Default

 

The U.S. E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the U.S. economy, according to Paul Merolli, a senior editor and correspondent for Energy Intelligence, an energy sector news and analysis aggregator. Merolli’s report calls out the over-leveraged, under-hedged U.S. E&P sector, which has been trying to keep up appearances over the past 12 months by slashing operating costs and capex to keep production costs lower than oil prices.

But experts believe that lower costs and improving efficiency won’t be enough for the sector as it grapples with some $200 billion-plus in high-yield debt, which the U.S. E&P sector used to finance the shale oil boom. According to Standard and Poor’s, there have already been 19 U.S. energy sector defaults so far in 2015, while another 15 companies have filed for bankruptcy. The default category also includes companies that have entered into “distressed exchanges” with their creditors.

Moreover, a Nov. 24 report from S&P Capital IQ titled “A Cautionary Climate” shows that the total assets and liabilities of U.S. energy companies filing for bankruptcy protection have grown in each quarter of 2015, and the third quarter was no exception with assets totaling more than $6.2 billion and liabilities totaling more than $8.9 billion. Each quarter of 2015 was larger than the total for all U.S. energy bankruptcies in 2014.

Also see: Oil Patch Bankruptcies Total $13.1 Billion So Far This Year

U.S. E&P Sector: Junk rating

According to Energy Intelligence, Standard & Poor’s applies ratings to around 100 E&P firms. Of these, 77% now have high-yield or “junk” ratings of BB+ or lower, 63% are rated B+ or worse, and 31% or 51 companies are rated below B-. Companies rated B- or below are effectively on life support, while those rated C+ are “maybe looking at a year, year-and-a-half before they default or file for bankruptcy,” according to Thomas Watters, managing director of S&P’s oil and gas ratings, speaking to Energy Intelligence.

High-yield E&Ps are expected to see negative free cash flow of $10 billion during 2016, even after all the recent capex cuts and efficiency measures. Unfortunately, capital markets are closing rapidly to new E&P debt issues. Last year, the U.S. E&P sector raised $29 billion from 44 issuances of public debt in 2014, but this year only $13 billion has been raised across 23 issuances, almost all of which occurred during the first half of the year.

What’s more, the U.S. E&P sector is woefully under-hedged. Energy Intelligence’s data shows that small producers have 27% of their oil production hedged at an average price of $77/bbl, mid-sized firms have 26% hedged at $69, and large producers have just 4% hedged at $63.

U.S. E&P sector: a final lifeline

It is believed that the U.S. E&P sector will really start to cave in April when banks are due to start their next review of borrowing bases. Borrowing bases are redeterminedevery six months, and banks use market oil prices to calculate the value of company oil reserves, which companies are then able to borrow against.

Haynes and Boone’s Borrowing Base Survey is predicting an average cut of 39% to borrowing bases when the next round of revaluations take place. In September, The Financial Times reported on a research note from Bank of America which pointed out that only a fifth of “higher-quality” energy companies had used up more than half of their borrowing base capacity. For junk-rated companies, however, it’s a different picture. Citi points out that only 21% of the junk-rated energy companies it covers have any borrowing base capacity left at all.

So with borrowing bases set to fall at the beginning of next year and capital market access drying up, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward. Another source of concern for E&Ps and their lenders are price-related impairments and asset write-downs which have already amounted to $70.1 billion so far this year, compared to the $94.3 billion total for the previous 10-year period of 2005-14. And there could be further write-downs on the horizon:

“Year-to-date, there has been $70.1 billion in asset write-downs in 2015, approaching the $94.3 billion total for the previous 10-year period of 2005-14, according to Stuart Glickman, head of S&P Capital’s oil equities research. And he expects even more write-downs and impairments to emerge at year-end. “Companies are putting this off for a long as they can. You don’t want to be negotiating in capital markets with a weakened hand,”

“Chesapeake Energy, one of the largest US independent producers, shocked earlier this month by indicating a $13 billion reduction in the so-called PV-10, or “present value,” of its oil and gas reserves to $7 billion. Had Chesapeake used 12-month futures strip prices — instead of Securities and Exchange Commission-mandated trailing 12-month prices for PV values — the value would’ve fallen to $4 billion.” — Source: Energy Intelligence, “Is Debt Bomb About to Blow Up US Shale?

This conclusion is also supported by research from S&P Capital IQ:

“Using data from SNL Financial, we looked at natural gas-focused companies across the value chain to see whether there is a relationship between their level of revolver usage and their forward multiples. Within this subset of companies, exploration and production (E&P) companies have the greatest usage of their revolving credit facilities — 57% on average, excluding those with either no revolving credit or no usage on their revolving credit lines. As of late September 2015, this sub-industry also had a forward EBITDA multiple of about 6.2x.” — Source: S&P Capital IQ, “A Cautionary Climate.”

E&P sector waiting for a bailout

All in all, it looks as if the U.S. E&P sector has a rough year ahead of it, but for strong companies with investment-grade credit ratings, next year could become an “M&A playland” according to Energy Intelligence. The six-largest integrated majors together hold a war chest of some $500 billion, and there’s a further $100 billion in private equity sitting on the sidelines.

Whatever happens, it looks as if the U.S. E&P sector is about to undergo a period of significant change.

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Oil Guru Who Called 2014 Rout Sees $ 70 Oil in 2016

  • PIRA sees demand growth at 1.7 million barrels a day in 2016
  • Production from non-OPEC nations including U.S. seen declining

OPEC will probably hold production steady at its meeting next month as the gap between supply and demand for oil closes, according to the analyst who correctly predicted last year’s rout in prices.

“I don’t think they have to do anything,” Gary Ross, founder and chairman of PIRA Energy Group, said in an interview in Singapore on Monday, referring to the Organization of Petroleum Exporting Countries. Global consumption of crude will continue to grow while output from non-OPEC countries will decline next year, helping to bring the market toward equilibrium, he said.

Oil tumbled more than 48 percent last year as U.S. stockpiles and production expanded, creating a global oversupply that the International Energy Agency estimates will persist until at least the middle of 2016. OPEC’s strategy to defend market share has exacerbated the glut as the group, which kept its production target unchanged at 30 million barrels a day at the last meeting in June, exceeded the quota for the past 17 months.

“There has to be a tightening of balances,” said Ross, who last year turned bearish on oil before prices shrank by almost half. While OPEC volumes have increased, both demand and production from outside the group have responded to low prices, he said.

Brent crude for December delivery was unchanged at $49.56 a barrel on the London-based ICE Futures Europe exchange at 12:50 p.m. Singapore time. Prices have decreased 14 percent this year.

$70 Brent

PIRA forecasts demand for crude to grow 1.7 million barrels a day in 2016, compared with 1.9 million a day this year. Output outside OPEC is expected to decline next year by “several hundred thousands of barrels a day,” Ross said. Among the 12 members of OPEC, production is predicted to increase only in Iran and Iraq.

“Total non-OPEC crude and condensate production is forecast to fall below last
year’s levels,” said Ross, predicting that Brent may rise to $70 by the end of 2016. “Supply growth is limited to OPEC, which grows just 500,000 to 600,000 barrels a day.” On average, Iran’s output will rise 300,000 barrels a day and Iraq’s will increase 240,000 barrels a day, compared with a year earlier, he estimated.

OPEC, which supplies about 40 percent of the world’s oil, is scheduled to gather in Vienna on Dec. 4, when Iran will officially notify the group of its plans to boost production by 500,000 barrels a day as soon as international sanctions against the Persian Gulf state are lifted, Oil Minister Bijan Namdar Zanganeh said in an interview with Mehr news agency.

 

Russian Crude Output Hits Post-Soviet Record

Russian oil production broke a post-Soviet record in October for the fourth time this year as earlier investments boosted output and producers prove resilient to lower crude prices.

Production of crude and gas condensate, which is similar to a light oil, averaged 10.776 million barrels a day during the month, according to data from the Energy Ministry’s CDU-TEK unit. That is an increase of 1.3 percent from a year earlier and up 0.3 percent from the previous month.

“Russian oil production is still reflecting oil prices above $100 a barrel due to long lead times in the investment cycle,” Alexander Nazarov, an oil and gas analyst at Gazprombank JSC, said by e-mail from Moscow. “The reason behind growth this year dates back to 2010-2014, when a number of projects were financed.”

Output has kept growing even as the Organization of Petroleum Exporting Countries chose to defend market share rather than cut output amid a supply glut last year, a decision that sent prices tumbling. Gazprom Neft PJSC and Novatek OJSC are ramping up output at one of the country’s biggest new projects. Russia’s tax policies insulate the industry from swings in oil prices, with the state bearing most of the risk and reward.

The ruble’s slump over the past year, which has tracked weaker crude prices, has made oilfield services, including drilling, cheaper and supported operating margins, Nazarov said.

Russian crude exports rose to 5.42 million barrels a day in October, a 10 percent gain from the previous year and up 1.7 percent from the previous month.

Oil 5 Talking Points – All Point to Lower for Longer ?

 

Oil’s bounce back from the summer’s lows has the look of a bottoming in crude prices, but some strategists say the shakeout is not over.

“I’m pretty sure we’re going to see a new low. The probabilities are that we see a new low or two or three,” said Jack Bass. Our 2015 results for managed accounts all did well by avoiding oil and natural gas and that continues to be our bias.

The negative factors that have pounded oil prices continue to hang over the market, and the world is still facing oversupply of about 2 million barrels a day. Strategists say the chief wild card that could send oil to new lows is Iran — and uncertainty about when and how fast it can bring crude back to the market.

This past summer, West Texas Intermediate crude futures touched a low near $38 in late August before moving back to $50 per barrel on Oct. 9. Since then, oil has traded in the upper $40s, giving the impression the worst lows of the bear market in crude are over. Brent, the international benchmark, hit a low at around $42 per barrel in August and temporarily rose above $54 in October.

“There was a bout of short covering, and oil was pumped up on geopolitical fears about Russia’s foray into Syria, but the fundamentals never changed. Production is still high all around the world, and the glut is getting worse, especially for diesel fuels,” said John Kilduff of Again Capital.

1. Iran as a catalyst

Major producers continue to pump at high levels, and demand continues to lag. U.S. shale producers have more resilience than expected, and the U.S. is still producing about 9 million barrels a day.

But it’s Iran’s oil production that some analysts say the market may not be pricing correctly. They also say Iran may be making blustery assertions about its oil production that it will not be able to meet.

The U.S. and five other nations agreed in July to lift sanctions against Iran in return for curbs on its nuclear program, and this past Sunday the agreement was formalized based on Iran’s meeting its commitments to the deal.

An Iranian official this week said the country has already secured buyers from Europe and Asia for more than 500,000 barrels a day in new exports once sanctions are lifted. The final assessment by the International Atomic Energy Agency is expected to be completed by Dec. 15.

“If they put that marginal barrel onto the market, there’s going to be a price impact from it. The Saudis have taken a lot of their market share from Europe in the last couple of years,” said Michael Cohen, head of energy commodities research at Barclays. “It’s going to be a fine balance. I wouldn’t be surprised at the end of 2016 if we look back at the end of the last year and be surprised that they put only 400,000 to 500,000 barrels back on the market, not 800,000 to 900,000 barrels.”

Iran has been producing about 2.8 million barrels a day, from a high of 4.2 million barrels, according to Andrew Lipow of Lipow Oil Associates. “It would surprise me to see 500,000 a day come out onto the market within a couple of months,” he said. “The market takes what they say with a grain of salt. We do know that they are going to be exporting the first minute they can.”

It could be the start of Iran’s oil returning to market that sends oil prices back to the lows, said Citigroup’s Morse. He said the oil market could hit bottom late this year or in the first quarter, but he does not expect Tehran to be able to quickly push the volume of new oil that it is promising.

“These shut-in wells have been building pressure. They can surge production beyond what is sustainable, and if they want to show the world they are there, which is highly likely, that is possible,” he said. Morse said he expects Iran could produce 300,000 to 500,000 barrels a day more within a half year of sanctions being lifted.

Iran also has about 40 million barrels of condensates in floating storage. “I just think the market has underestimated how much oil could come back on the market immediately upon having sanctions released,” Lipow said.

2. Inventories bulging

A second thorny issue for the market is buildup of inventories. Last week U.S. government data showed a surge in crude stocks of 7.6 million barrels of oil, but it is also the buildup of refined products that analysts are watching.

Barclays, in a report, said that global refinery runs grew faster than demand by about 57 percent during the second and third quarter. That created a buildup, pushing refined products into storage in offshore tankers.

Refining capacity has been added around the globe. Saudi Arabia, for instance, shipped less crude in August but more refined oil products. According to JODI data, Saudi Arabia exported 1.3 million barrels a day of refined product, compared to 1.1 million barrels the month earlier.

The U.S. has also increased refined-product exports as well and is a net exporter of about 2 million barrels a day. Barclays expects the rate of build in refined products to slow.

“Fundamentally speaking, we remain in an oversupply situation, and refining margins are weak and likely to get weaker, especially in distillates, and the stocks remain at high levels,” said Cohen. “So any sustained price move tot he upside is going to be met by with skepticism by the market and that’s why we continue to maintain our range bound price forecast at least until the third quarter of next year.”

3. U.S. shale gale

A third bearish factor for oil has been, and continues to be, the resilience of the U.S. oil industry. Saudi Arabia and OPEC vowed last fall to continue producing and to allow the market to set prices in an oversupplied world, a factor they were hoping would curb non-OPEC production.

But U.S. production, despite shut-in rigs, has not fallen that much. Analysts had been expecting some companies to lose some funding in bank redeterminations this month, but it seems the industry is doing better than expected, and the impact is relatively minor.

“We think for WTI there’s downside risk for the first quarter based on the fact we think U.S. production may not roll over like people think,” said Cohen. “We need to see prices go lower as a disincentive.”

Analysts now expect the companies facing lending reviews to have a difficult time in the spring after more months of low oil prices. The U.S. industry is made up of so many companies drilling so many unconventional wells that the trigger of falling prices is not an automatic one, since producers are profitable at all different levels.

“High-yield companies are well-hedged through the first quarter, and then their hedges go off, and it’s not clear they have the cash flow to keep drilling,” said Morse.

Cohen said the pressure from a long period of low prices will pinch companies. “U.S. production is likely to be lower,” he said, adding the hit to shale producers will be worse next year after several more quarters. “It will be worse, not just for those that have their borrowing base redetermined.”

4. Biggest producers producing

Russia and Saudi Arabia are the world’s biggest oil producers, and both of them have taken a full-throttle approach to lower prices in an effort to gain or hold share.

Saudi Arabia led OPEC in its plan to use market pricing as a weapon to slow overproduction. When OPEC meets in early December, analysts see little chance of a change in policy.

In fact, rhetoric around that meeting could add downward pressure on prices.

“The Saudis have been adding more to inventories. I don’t really see them backing down from the 10 million-barrels-a-day production level. They continue to be open to a cut if other producers are willing to cut first,” said Cohen. “They’ve taken a very tit-for-tat approach. They want to see a plan and a credible plan before doing anything.”

The strain of low prices is wearing on both Russia and Saudi Arabia. “They (Saudi) can shield the blow by issuing more debt, which they have done,” Cohen said. “The amount of debt they are issuing this year is basically the equivalent of a $10 bump in oil prices.”

Morse said the producers will not be able to sustain production in a low-price environment forever. “Definitely at some point, in the winter of 2016/2017, it looks like the world moves into a net inventory drawdown, helped by U.S. shale, helped by production in Mexico, the North Sea, Oman, Russia … all showing decline rates instead of staying stable,” he said.

5. World demand

Oversupply hit the world market at the same time demand from the emerging world and China was dampened. China reported GDP of 6.9 percent for the third quarter just below last quarter’s 7 percent pace, but worries about Chinese growth and demand have pressured prices.

The World Bank this week said it expects oil prices to remain weak through next year, and it cut its expectations for crude. The World Bank’s quarterly commodity sector report pared its average oil price forecast to $52 per barrel this year from an earlier estimate of $57. It sees an average price of just $51 in 2016.

The Bank said Iran’s return to the market will dent oil prices, but it also noted weak global growth.

“All main-commodity price indices are expected to decline in 2015, mainly owing to ample supply and, in the case of industrial commodities, slowing demand in China and emerging markets,” the Bank said.

Besides overproduction, high inventories and weak demand, Morse said another factor that could weigh on prices are the speculative investors who could slam the oil price once Iran brings oil back onto the market.

He said WTI could average $40 per barrel in the fourth and first quarters, and Brent could average about $44. Barclays expects Brent to average $53 per barrel in the fourth quarter and $63 in 2016 after a recovery in prices in the second half.

 

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Iran – Oil sanctions to be lifted in late 2015 or early 2016 – Adding 2 Million Barrels A Day

Iran has said it will offer about 50 energy projects to investors and plans to boost output by about 2 million barrels a day once the deal is in place.

Sanctions against Iran probably will be lifted within the first three months of 2016, after the International Atomic Energy Agency has confirmed the nation has curtailed its nuclear work, diplomats said last month. Once the restrictions are removed, relief is expected to fuel economic growth by lowering barriers to Iran’s oil exports and ending the isolation of its banks.

Iranian Oil

Iran has said it will offer about 50 energy projects to investors and plans to boost output by about 2 million barrels a day once the deal is in place. The Persian Gulf nation, with the world’s fourth-largest oil reserves, pumped 2.8 million barrels a day last month, according to data compiled by Bloomberg.

One nation, Japan, plans to triple its imports of Iranian crude once sanctions are lifted, the Iranian Oil Ministry’s Shana news agency said on Saturday, citing Seyed Mohsen Ghamsari, director of international affairs at National Iranian Oil Co. Japan will increase purchases to 350,000 barrels a day from 110,000 barrels, the agency said.

The U.S. waivers will result in the lifting of sanctions that now restrict or penalize non-U.S. companies for engaging in various economic activities, including buying Iranian oil and dealing with many Iranian banks, the U.S. officials said.

Narrow Categories

But for U.S. companies, sanctions will be eased only for certain narrow categories, the officials said. They said these include the export of civilian passenger aircraft, the import of spare aircraft parts and handicrafts from Iran, and some activities that subsidiaries of U.S. companies can conduct overseas.

In addition, Obama told reporters on Friday that sanctions “related to ballistic missiles, human-rights violations, terrorism — those, we will continue to enforce.”

In another sign of progress, IAEA monitors last week ended their 12-year investigation into the possible military dimensions of Iran’s nuclear past. Inspectors now have until Dec. 15 to draft and present a final assessment of their inquiry.

Iran’s nuclear work has been the focus of international scrutiny since February 2003, when Iranian officials told inspectors visiting Tehran of their plans to begin enriching uranium on an industrial scale. Subsequent discoveries that Iran had secretly procured nuclear materials and technologies led to years of mistrust. In May 2008 and again inNovember 2011, the IAEA publicly disclosed its suspicions about Iran’s activities.

Iran has consistently denied ever seeking a nuclear weapon.

Timeline to lifting sanctions:

  • Sunday — “Adoption Day” for July accord signed with world powers. Parties to the agreement begin meeting their commitments.
  • Nov. 30 — Iran prepares to end testing of advanced centrifuge cascades and store machines under IAEA seal.
  • Dec. 15 — IAEA to present its assessment of Iran’s past nuclear activities, which board will use “with a view to closing the issue.”
  • Late 2015-early 2016 — Oil sanctions to be lifted on “Implementation Day.” U.S. officials have suggested it will take at least two months from “Adoption Day” to reach this point.

    Saudi Arabia, the world’s largest oil exporter, is storing record amounts of crude in its quest to maintain market share as it cut shipments.

    Commercial crude stockpiles in August rose to 326.6 million barrels, the highest since at least 2002, from 320.2 million barrels in July, according to data posted on the website of the Riyadh-based Joint Organisations Data Initiative. Exports dropped to 7 million barrels a day from 7.28 million.

    “The fall in Saudi crude exports reflects the market reality,” Mohammed Ramady, an independent London-based analyst, said Sunday by phone. “It’s normal to see this fall knowing that the market is becoming highly competitive, with many countries in OPEC selling at discounts and under-pricing the Saudi crude.”

    Crude inventories have been at record highs since May, a month before Saudi Arabia’s production hit an all-time high of 10.56 million barrels a day. The nation has led the Organization of Petroleum Exporting Countries in boosting production to defend market share, abandoning its previous role of cutting output to boost prices.

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Credit Suisse: Oil Has Stabilized Because Saudis Got What They Wanted

 

Forget wealth effect. The global equity market can’t have a smooth bull run if oil prices are tanking.

This is because commodity-related capital expenditure accounts for around 30% of total capex globally, so even though consumers may benefit from cheaper oil, companies are hit first.Credit Suisse estimates that the fall in commodities capex has taken at least 0.8% off the U.S. economic growth in the first half this year and 1% off global growth over the last year.

But the worst is over, according to analyst Andrew Garthwaite and team. They listed three reasons: 1. demand for oil has stabilized; 2. non-OPEC production has peaked; 3. Saudi Arabia has achieved its goal of deterring new entrants.

Since Saudi Arabia is the wild card, Credit Suisse analysts took pains to explain their position:

We believe that the key variable is Saudi Arabia. If it were not for Saudi Arabia, then we fear that oil would have to behave like other commodities and if there is excess supply fall to levels where a third of production is below the cash cost and, given the likely fall in commodity currencies, this in turn would lead to a much lower oil price (maybe down to $30/barrel).

This leads to the question ‘Can Saudi Arabia support the oil market?’. We think the answer is yes. They control the vast majority of spare capacityaccording to our oil team and 13% of output.

Their clear aim was to restore market share against non-OPEC and avoid being a swing producer (and thus not repeat the 1980 to 1985 experience, when their oil production fell by 70% as they sought to defend the oil price) and also limit the growth in alternative energies. The key is clearly at what point they have achieved their objective. The issue is nearly always the same – costs fall much more quickly than expected, partly because commodity currencies fall and partly because of cost deflation.

Moody’s highlight that the breakeven for median shale is around $51pb. Thus it may be the case that around the current oil price, Saudi Arabia believe they have achieved their objective of pricing out new shale projects.

Additionally the reduction in the oil price has come at a cost, with the budget deficit estimated to be 20% of GDP in 2015 (IMF Article IV – Saudi Arabia). While government debt to GDP is very low at c1%, we view the recent selling of Sama reserves and the first sovereign bond issue since 2007 as signs that there is some degree of stress.

Brent crude jumped another 2.2% to trade at $49.58 recently after a 5% rally overnight.

Oil stocks rallied. CNOOC (883.Hong Kong/CEO) advanced 12.1%, China Oilfield Services(2883.Hong Kong) gained 9.5%, PetroChina (857.Hong Kong/PTR) was up 7.8%. Sinopec(386.Hong Kong/SHI) jumped 6.8%. The Hang Seng China Enterprises Index advanced 4%. Overnight, the United States Oil Fund (USO) rose 4.9%.